Starting a business comes with many questions, especially about taxes. One of the most common questions is, Do I need an LLC to write off business expenses? The abbreviated answer is no, but there are significant minutiae, benefits, and constraints you experience before making arrangements about your business architecture and tax approach.
What Is a Limited Liability Company (LLC)?
A limited liability company (LLC) is a business structure in the U.S. that protects the
equity of its owners from lawsuits and creditors disturbed with the company’s business debts.
Limited liability companies are hybrid entities that associate the characteristics of a business with those of a partnership or sole proprietorship.
While the limited liability component is similar to that of an enterprise, the availability of pass-through taxation to the meeting of an LLC is a feature of a partnership rather than an LLC.
KEY TAKEAWAYS
- The limited liability company (LLC) is a corporate structure that protects its owners from actually being personally held liable for restitution of the company’s debts or liabilities.
- The regulation of LLCs varies from state to state.
- Any entity or particular can be a member of an LLC, with the conspicuous exceptions of banks and insurance companies.
- LLCs do not pay taxes on their profits directly.
- Their profits and losses are acknowledged through a report, where they report them on their respective tax returns.
The IRS’s View on Business Deductions
The IRS allows a taxpayer to deduct traditional and essential expenses incurred while conducting a trade or business.
According to IRS Publication 535, these terms mean
- Ordinary: A common and accepted expense in your industry or line of work.
- Necessary: An expense that is helpful and appropriate for your business.
This means that even if you’re a sole proprietor—performing under your name without an LLC—you can still deduct business expenses.
Common deductible expenses include:
- Office supplies
- Business travel
- Meals (subject to limitations)
- Advertising and marketing costs
- Equipment and software
- Home office deductions (if applicable)
- Internet and phone bills (portion used for business)
- Professional services (legal, accounting, etc.)
As long as you are accepting income from a business enterprise and tracking your expenses properly, you can write off business-related costs.
Who Can Write Off Business Expenses?
Anyone who earns income from self-recruitment or business enterprise can commonly write off related expenses, disregarding whether they have a formal business structure like an LLC.
Examples of people who can deduct expenses without an LLC:
- Freelancers and gig workers
- Independent contractors
- Sole proprietors
- Side hustlers (e.g., resellers, tutors, artists)
These entities report business income and reparations on Schedule C of their tax return (Form 1040).
Who Can Deduct Business Expenses?
The ability to write off business expenses applies to various business structures:
- Sole Proprietors: These individuals achieve without a formal legal entity. They report income and expenses, accepting Schedule C (Form 1040). No LLC is appropriate.
- Independent Contractors and Freelancers: Even if you are self-employed and accept 1099 forms, you can subtract justified business expenses.
- Partnerships: These must file an independent partnership tax return (Form 1065), but original partners report income and expenses on a Schedule K-1. Again, confining an LLC may help limit liability, but it is not an obligation for deductions.
- Corporations (C-Corps and S-Corps): These individuals file their tax return. Business expenses are deducted at the collective level before profits are distributed.
The Benefits of an LLC (That Aren’t About Write-Offs)
Even though forming an LLC isn’t required to write off expenses, there are several good reasons entrepreneurs choose to form one:
1. Limited Liability Protection
As the name suggests, an LLC limits your liability for business debts and lawsuits. This is especially valuable if you have clients, physical products, or employees—anything that could lead to potential legal claims.
2. Professional Appearance
Operating under an LLC can enhance your credibility with clients, vendors, and lenders. It gives the impression of a more established, serious business.
3. Flexible Tax Options
An LLC can be taxed in different ways. A single-member LLC is taxed like a sole proprietorship by default, but you can elect to be taxed as an S corporation if it provides tax improvement (e.g., paying yourself a salary and saving on self-employment taxes).
4. Easier to Separate Finances
Having a separate legal entity encourages you to open a business bank account, track finances separately, and maintain cleaner financial records. This makes it easier to identify and justify your deductions during tax season.
When You Might Want to Form an LLC
While not necessary for deducting expenses, an LLC might be the right move if:
- You want to limit personal liability.
- You’re earning significant income from your business.
- You’re working with clients, handling confidential information, or selling physical products.
- You’re interested in scaling or bringing on partners.
- You want to brand your business with a unique name.
- You’re seeking to elect S corporation status for tax purposes.
What Matters for Deductions
Whether or not you have an LLC, here’s what the IRS cares about:
1. Profit Motive
You must show that your movement is a business and not a hobby. If your activity loses money year after year, the IRS may rebuff your deductions. The IRS’s “hobby loss rule” states that a business should customarily show a profit in at least three out of five years.
2. Documentation
You need proper documentation to support your deductions, including:
- Receipts
- Invoices
- Bank statements
- Mileage logs (for car expenses)
- Written notes about the business purpose of meals or travel
3. Separate Finances
Keeping your business and personal finances independent makes it easier to identify business expenses and oppose them if audited. This can be done even without an LLC by opening a dedicated business bank account.
4. Accurate Tax Filing
Whether you file as a sole proprietor or through an entity, maintaining accurate recordkeeping and filing the appropriate forms (e.g., Schedule C for sole proprietors, Form 1065 for partnerships, or Form 1120 for corporations) is crucial.
Risks of Claiming Deductions Without a Legitimate Business
Claiming business expenses without having legitimate business activity can raise red flags with the IRS.
Common issues include:
- Misclassifying hobby activities as business
- Overstating expenses
- Combining personal and business expenses
- Not reporting all income
These can lead to audits, penalties, and back taxes. Although forming an LLC isn’t required, maintaining clear and professional financial records and demonstrating a genuine intent to make a profit are essential.
Final Thoughts
You do not need an LLC to write off business expenses. What’s more is that you’re performing a bona fide business and keeping authentic records of your income and expenses. However, forming an LLC can offer legal protection and other strategic advantages, especially as your business expands.
Before making a decision, consider speaking with a tax professional or business attorney to ensure you’re choosing the best structure for your goals.